Warren Buffett Watch

The cryptocurrency market can’t seem to do enough to convince the mainstream investment community. Following the launch of Bitcoin in the late 2000s and its subsequent rise in price versus traditional currencies, several other cryptocurrencies have cropped up in a bid to share in Bitcoin's success. Whether they can reach the same level remains to be seen, but it is correct to say that some of them – like Ethereum – are already making significant leaps.

What’s more interesting is that some of these cryptocurrencies are already becoming a global force in the currency markets with virtually every country in the world now being involved. To bring this to perspective, the U.S. stock market is the largest in the world in dollar value and reach, yet it does not command as large an audience as Bitcoin does. It could be argued that the general forex trading market is even bigger, but given Bitcoin only started trading a few years ago it sets up an interesting scenario for the future.

A new episode of the GuruFocus Podcast comes out today. The episode features a talk with the authors of University of Berkshire Hathaway, investors Daniel Pecaut and Corey Wrenn. Daniel and Corey attended 30 years of Warren Buffett (Trades, Portfolio)’s annual shareholder meetings since 1983, taking notes each year, which they have placed in this year-by-year collection.

As students of Buffett and Munger, and teachers themselves, Daniel and Corey discuss making the unprecedented project that enables investors to hold three decades of history in one volume, as well as the unique insights they gained taking in the wisdom of Buffett and Munger every year.

Warren Buffett (Trades, Portfolio) has long been considered the consummate value investor. His penchant for value investing is generally attributed to his relationship with the renowned father of value investing Ben Graham.

What is often overlooked is the influence that partner Charlie Munger (Trades, Portfolio) brought to Buffett's investing philosophy. Buffett attributes Munger with introducing him to the concept of investing for growth at a reasonable price. Consequently, Buffett has evolved from the traditional Ben Graham “cigar butt” value investing strategy into a GARP (growth at a reasonable price) approach.

We’ve heard Warren Buffett (Trades, Portfolio) continue to repeat an important phrase: “What the wise man does in the beginning, the fool does in the end.”

This begs the question, when does a foregone conclusion become what we call “a well-known fact”? Today’s bifurcated stock market makes for a good time to analyze some crowded historical opinions in the U.S. stock market and compare them to those held today. We will do this while most market participants attempt to predict when the next major stock market decline is coming.

When it was revealed Warren Buffett (Trades, Portfolio) had decided to build a $10 billion position in the largest airlines in the U.S., many market commentators reacted with surprise. Buffett has always stayed away from the airline industry because it is plagued with problems. Volatile fuel prices, high capital costs, price wars and unpredictable unions all combine to make the industry an extremely uncertain and challenging place to invest. Indeed, at the beginning of the year, Buffett himself noted, “I think there have been almost 100 airline bankruptcies. I mean, that is a lot," he said in an interview with CNBC. "It's been a disaster for capital."

In the same interview, he alluded to the fact he believes the industry has put its bad practices behind it. Specifically, the "Oracle of Omaha" said, "it's true that the airlines had a bad 20th century. They're like the Chicago Cubs. And they got that bad century out of the way, I hope."

I recently wrote about Seth Klarman (Trades, Portfolio)’s interest in Synchrony Financial (NYSE:SYF), the financial services company that has seen its share price suffer this year thanks to higher reported loan impairments.

Klarman initiated his position at the end of 2016, but then reduced the holding by 14.5% during the first quarter. Surprisingly, he then increased his holding by 66% during the second quarter according to the firm’s 13F. The additional buying means Synchrony is now Baupost’s second-largest holding after Cheniere Energy (LNG).

Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) made its first new buy since the fourth quarter with a purchase of credit services company Synchrony Financial (NYSE:SYF).

Buffett had already revealed before quarter-end that he bought shares of real estate investment trust STORE Capital and confirmed a position worth 18,621,674 shares, representing 9.8% of its shares outstanding, in the portfolio released today.

If you have not heard of Philip Fisher, you should have. While Benjamin Graham gets most of the credit for educating Warren Buffett (Trades, Portfolio), Buffett himself has stated he is “85% Graham and 15% Fisher.” I would argue this ratio has shifted to 85% Fisher and 15% Graham as Buffett’s strategy has strayed from value toward growth.

Broadly speaking, Fisher’s strategy was growth at a reasonable price, although it was much more involved. Fisher liked to do in-depth research on the companies he was buying, visiting management, suppliers and customers to get the best idea of the business.

Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) reported second-quarter results last Friday. Net income was $4.3 billion in the quarter, a decline of 15% from the year-ago period. As always, we need to make some adjustments to try and normalize the results. For example, if we exclude investment and derivatives gains and losses, as well as the change in corporate interest expense from the year-ago period (which primarily reflects the impact from movements in foreign currency exchange rates on euro denominated debt), earnings increased marginally. Those changes are timing issues. For an apples-to-apples comparison, we should also account for the impact of business decisions that diminish reported profitability but make sense in the long term (for example, retroactive reinsurance agreements, which I will discuss in a moment). Looking at the headline numbers on their own will not get the job done if you truly want to understand the underlying trends in Berkshire's businesses.

The five largest positions at quarter-end – Wells Fargo (NYSE:WFC), Apple (NASDAQ:AAPL), The Coca-Cola Company (NYSE:KO), American Express (NYSE:AXP) and IBM (NYSE:IBM) – accounted for more than 60% of Berkshire’s $137 billion in equities. For now, that list does not include Bank of America (NYSE:BAC). That should change in the coming months: Berkshire announced at the end of June that it intends to exercise the Bank of America warrants, at which point it will own 700 million shares of common stock – worth $17.7 billion at today’s stock price.

The second-quarter contest begins today. To participate, pick THREE securities you think he rounded up in the three months from March 31 to June 30 and type them into the “comments” section below this article. Hit “post comment.”

Net earnings represented the weak point in Berkshire’s headlining numbers for the second quarter. Buffett’s second-quarter net earnings totaled $4.26 billion, compared to second-quarter 2016 net earnings of $5.0 billion. The earnings were on increased second-quarter revenue of $45.71 billion, compared to second-quarter 2016 revenue of $43.39 billion. Berkshire’s book value increased 6.2% since the end of 2016, and its cash position ballooned to $107 billion.

Early in his career, Warren Buffett (Trades, Portfolio) was able to make a name for himself (as well as millions of dollars in profit) by investing in stocks trading at single-digit earnings multiples and below book value. Plenty of other value investors have also made a fortune following this strategy, but with the market trading at all-time highs, are there any deep-value opportunities left?

To answer this question, I decided to conduct a deep-value stock hunt in an attempt to try and uncover some deeply discounted securities that might be attractive value investments in the current environment.

You might not be aware of anchoring bias, but it has almost certainly affected at least one of your investment decisions.

Anchoring is the human tendency to rely on the first piece of information offered. For investors, the first piece of information can come in many forms, but generally, a stock chart will be the first thing viewed when researching a new position. This opens you up to anchoring for the equity price. How many times have you heard that since a stock is down a certain percentage, it looks cheap? This assumption is based not on a company’s valuation, but the movement of the stock price.

Apple Inc. (NASDAQ:AAPL), one of the world’s largest consumer electronics manufacturers, said fiscal third-quarter revenues increased 7% year over year, the “third consecutive quarter of accelerating growth” according to CEO Tim Cook.

The Cupertino, California-based company reported $45.4 billion in revenue during the quarter ending June 30, up $3 billion from fiscal third-quarter 2016. Diluted net earnings of $1.67 climbed approximately 25 cents from the prior-year quarter.

“Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable – and some losses are inevitable – you might be wise to utilize a very conservative patterns of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.” – Charlie Munger (Trades, Portfolio)

Investing is Munger and Buffett’s specialty, and they both understand what it takes to succeed in the market. Munger, in particular, has issued many different statements over the years about how important it is to play to your own rules in investing if you want to succeed.

Halfway through earnings season, the outlook remains bright. Many of the most high-quality dividend stocks have beat expectations, and corporate earnings seem to be growing at a rate higher than expected (although time will tell if this trend holds).

Facebook (NASDAQ:FB) is now worth $500 billion. Chairman and CEO Mark Zuckerberg is closing in on Warren Buffett (Trades, Portfolio) for the fourth-wealthiest human on Earth. I hate to admit this, but Gary Vaynerchuk was right about the short-term price increase on Facebook this year, seeing (and even driving) the growth of online ad spend on the platform. That said, there is no way the company can continue to justify its price multiple at this point.

Even Valueline has a target price range of $230 to $340 on the stock. That means at the high end, the company would be worth $1 trillion if Valueline is right. The chances are that will not happen anytime soon.

There are many ways for investors to reduce risk. Diversification, using a wide margin of safety and only investing in companies with little or no debt are all, in themselves, ways to reduce risk. Together they can make a powerful combination. The most robust way to reduce risk, however, is probably the easiest of all.

Due diligence is an essential part of the investment process, but it is a part of the process a large number of investors skip. Everyone has heard the stories of fund managers on Wall Street who do not bother to read quarterly reports or annual reports and just charge in, following the herd. It is this herd mentality that has been attributed to the underperformance of active managers over the long term.

There are plenty of stories floating around about investors who have made millions from investing in hidden micro-caps and even bankrupt situations.

Irving Kahn, Walter Schloss and Benjamin Graham, as well as Warren Buffett (Trades, Portfolio), have all made money from these situations - and they are some of the most respected value investors of all time.

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